Effects of Changing Jobs on 401 (k) Plans

If you have come to
the point of considering changing your current employer, you should carefully
consider what impact will have this job change on your 401 (k) plan. Since such
things as penalties, taxes and employer matches are included, you should
cautiously study the effects of these on your plan.

Vesting Considerations

The first thing you
should consider when deciding to change your job is your vesting status. Since
money accumulates the more time you spend within the current employer 401 (k)
plans, it might be a good idea to not remove your plan for several months.
Generally, 100% vesting is provided for the contributions you make out of your
monthly salary. Nevertheless, if your employer provides matching of your
contributions, this matching vests for a particular time period (three to five
years). You should refer to your 401 (k) plan documents and ask the responsible
people in the company to see when exactly you will be provided with a 100%
vesting. Otherwise, you may end up losing your rights in terms of employer
matching and the corresponding profits.

Consider the following
example in order to better understand the impact of being fully vested. Tom has
decided to be 25% vested per year, which will continue over a four-year period.
Tom's annual salary is $60,000 and he has estimated that he can spare 12% out
of his income for annual contributions. As a result he allocates $7,200 every
year for his 401 (k) plan. We assume that his employer matches 100% of this
amount. Tom has been with his employer for 2 years and 10 months but for some
reason he wants to change his job. Since less than 3 years have passed Tom is
50% vested. If he decides to change his job now, he will receive 50% of the
employer's match. This means that he will get 50% of the $21,600 ($7,200 x 3
years), which amounts to $10,800. If he changes his mind and decides not to
leave his job for at least two more months, Tom will increase his earnings with
additional 25% meaning he will get additional 5,400$ of employer match.
Likewise, if Tom decided to stay the whole four-year period with his employer,
he would get additional $18,000 of the employer's match.

The moral of the
example is that you should carefully plan on the time of departure of your job,
since you may lose money from the premature leave.

Received Money Plan

Now that you have
firmly decided to leave your current job, you should not only consider the way
you will find another, but also construct a plan on what you are going to do
with the money of your 401 (k) plan. You should avoid committing the common
mistake of spending the money on something and not reinvesting them and ensure
your retirement years and tax avoidance.

Consider the following
example. John has $60,000 in his 401 (k) plan. He has decided to change his
job, but has not required for an automatic rollover to the retirement plan of
his new employer. As a result, he is given the money on hand and under the law
requirements he faces a 20% tax. Thus, he ends up with $48,000 in his account.
Unfortunately, John is 52 years old and being under the age of 59 ½ he has to
pay a 10% penalty or additional $6,000 out of his pocket. As a result he has $42,000
left to reinvest from his initial $60,000.

Depending on the tax
bracket in which John is, he will have to pay the difference if he is in a
higher one. For example, if John is in the 26% tax bracket, he will have to pay additional 6% or $3,600. This further
decreases his money to $35,400. John is also liable to state and local taxes,
which depending on the state in which he lives may deprive him from a few
thousand dollars more. As you can see, John's money disappeared almost by half.

As a result of all
these required by law deductions, John has seriously reduced his initial
investment and the corresponding money he can put in his new 401 (k) plan. Even
though John has found a better paying job, it will be hard to compensate for
the lost money.

Potential Alternatives

Now, we would like to
present to your attention several alternatives you have about your 401 (k)
money received after quitting your job.

Don't take the money with you.

Many employees will offer you to leave your 401 (k) money with the
company's retirement plan. This is offered in case you have no less than $5,000
in your retirement account. You should consider this option if your new
employer doesn't offer a 401 (k) possibility. Additionally, if you are pleased
with the management of the 401 (k) investments and they give you good returns,
consider the option of leaving your plan with the company.

Reinvest your money into the new employer's 401 (k) plan.

If your new employer offers a 401 (k) plan, don't hesitate to roll the
funds from your previous one to the new one. Before this you should check the
eligibility rules and whether there is a required waiting period. If the latter
is true, ask your previous employer whether you can leave the money with the
company until this period passes. In order to avoid the 20% taxes, you should
require the checks to be directly written to the new 401 (k) plan
administrator. Otherwise, you will have to pay the difference of 20% in order
to make a complete rollover with its tax implications. This 20% will be given
back to you at the end of the tax year, but you will have to meet different
requirements.

Rollover IRA Investment

You should consider the option of opening a rollover IRA account if your
future employer doesn't provide a 401 (k) plan. Additionally, this option is
suitable if your past employer doesn't give you the opportunity to leave your
money with their retirement plan. Rollover IRA accounts are widely available
through many banks and directly invest your money in a mutual fund or stocks.

Having all these facts
in mind, you should be very cautious the next time you decide on changing your
job, due to the effects it may have on your 401 (k) plan. Take under
consideration the options we have provided and carefully think over the right
time of changing your job in order not to lose any of your money.